The Ripple Effect of Foreclosure

Having the bank seize your home is nobody's idea of a good time. A word that was hardly part of the American vernacular two years ago, foreclosure is all too common these days. While the number of homes in some state of foreclosure is decreasing each month, the fact is that foreclosures across the country are up 19 percent from a year ago (RealtyTrac).

According to the Associated Press, one in every 385 homes received some sort of foreclosure-related notice in October. Foreclosure is a multi-step process that often begins with the loss of a job, includes several stages and can end with ruined credit. Banks repossessed over 77,000 homes last month, dramatically changing the lives of hundreds of thousands of people. What is harder to quantify is the ripple effect foreclosures have in not only devastating a single family, but also affecting an entire community.

A homeowner not only loses the house, but also all the money put into the house. The homeowner walks away from all the equity and any money spent on improvements. The tax liability and bad credit can linger for years after a foreclosure. Families can be uprooted and long-standing social ties can be broken. Emotions can run high and a person's self-esteem and sense of well being can be battered.

Then there is what can be called the "spillover effects" of foreclosure. Beyond the homeowner who lost a home, the property values of surrounding homes can be negatively affected. In the broader view, this can affect the local property tax base, which has far reaching implications for an entire city. Because the foreclosure can be drawn out, homes often remain empty for months. Empty or abandoned homes can fall into disrepair and even invite crime.

These are unusual times with the country still reeling from the Great Recession and perhaps unusual steps are needed to keep more struggling homeowners out of foreclosure. Both the Federal Reserve and the Treasury Department have enacted programs to get lenders to work with homeowners. Programs offering mediation before a bank can seize a property have helped in states like Nevada, where the foreclosure rate is the highest in the nation. (AP)

The recent decline in foreclosures is largely attributed to these measures by the government to encourage banks to work with homeowners before foreclosing. However, those efforts are only a drop in the bucket. The AP reported that about 650,000 borrowers, or 20 percent of those eligible, were taking part in temporary trial plans. The reality is that since the beginning of September, only about 1,700 loan modifications had been made permanent.

It's been reported that lenders are making efforts to delay foreclosure as they evaluate which borrowers might qualify for the government's loan modification program. Also, housing prices have started to climb again after three years of startling declines. This helps reduce the number of homeowners who owe more than their home is worth. As foreclosures remain at a crisis level, affecting a wide range of people, the Obama administration may need to push more lenders to take part in loan modification plans--for all our sakes.


Ki enjoys sharing his passion for Austin Texas real estate with future homebuyers. One way he distributes information in through his website, which offers a free search Austin MLS search. He lives and works in Austin, Texas. And writes on his blog about Austin real estate.